China’s consumption comeback

Gauging China’s consumption recovery 

For the past week, many investors have been fixated on U.S. elections and political developments. Meanwhile in China, consumers took a week off during the “Golden Week” holiday to travel and catch up on some shopping and spending, as we previewed in a previous note. Preliminary figures show a strong recovery in overall consumer activity. We think this goes to accelerate the healing process in the labor market, and could lend fresh support to the overall recovery. In this article, we will further analyze China’s recovery in light of Golden Week spending, as well as what it means for investors. 

The Golden Week saw a strong comeback in domestic consumption 

First, let’s take a look at the report card from Golden Week. As expected, domestic tourism travel rebounded. Top tourist sites saw 640 million visits—versus 780 million in 2019, roughly 80% of last year’s level. Given some major tourist sites have a 75% capacity limit in place, the rebound in demand looks pretty impressive¹. To get to their destinations, far more people drove than took the train this year (Chart 1). Hotels (particularly luxury hotels) and duty free shops in Hainan were the biggest winners². This may be partly explained by the diversion away from international travel amongst the more affluent middle class. And while some consumers didn’t travel, they still spent. Nationally, daily retail and restaurant spending during the holidays grew 5% compared to the previous year (Chart 2). While it’s still only half of last year’s growth rate, it is a sharp turnaround from the 6% decline in August. Cinema box office revenues also recovered back to 2019 levels³. 

A strong Golden Week suggests less reason to worry about “lasting damage” 

Of course, we need to read the Golden Week data carefully—there could be a lot of "pent-up demand" in the spending that may not last into the future. However, the data is nonetheless helpful for gauging the degree of "lasting damage" to the economy from COVID-19 disruptions. Given there has not been much fiscal stimulus to support the household sector in China, many have worried that the labor market hit could be a multi-year drag on consumption. All in all, while the labor market certainly has structural issues, we think the cyclical recovery is stronger than perceived and ‘lasting damage’ is not as bad as initially feared. There are two ways to assess this.

Firstly, given the relatively effective containment of COVID-19 in China, more and more sectors in the economy have normalized over the last few months. This has capped the permanence of job losses. While 6% of workers (around 54 million) exited the job market in Q1 2020—implying a lower labor market participation rate—this was reversed by the end of Q2⁴. Key to this recovery is China’s migrant worker population. As shown in Chart 3, as many as 50 million migrant workers did not return to urban areas after the Chinese New Year. But by Q2, they have largely returned. For the broad urban workforce, hours worked per week also recovered to pre-COVID levels in August. Meanwhile, the official surveyed unemployment rate for urban areas (for 35 cities) has also eased from 5.9% in May to 5.7% in August. It is still 0.5 percentage points higher than at year-end 2019, but it could continue to gradually ease as growth recovers. Taken together, this suggests ‘lasting damage’ is not as large as initially feared. 

Secondly, the normalization of consumer services is another important part of the puzzle. Broadly speaking, consumer services sectors such as hospitality, restaurants, and retail account for roughly a quarter of all jobs in the economy (Chart 4). These sectors are also an increasingly large driver of economic growth as well as job creation. The fact that we are now on the uptrend of the recovery in consumer services is likely to be another anchor for the labor market. In theory, this can become a positive, self-reinforcing process, whereby a return of consumer demand creates jobs, which in turn creates income and spending. 

Again, this is not to say that the labor market doesn’t have structural issues. For example, the job market for university graduates is incredibly competitive, given the more limited number of "good jobs" available. COVID-19 has further worsened the imbalance, as many companies have scaled back their hiring outlooks. The U.S.-China trade war has also dampened hiring for the last two years. These issues should be addressed by policies, such as helping firms to move up the value chain, as well as boosting domestic consumption to further reduce an export reliance. A more sustainable cyclical recovery can help with this process.

So all in all, the consumer rebound suggests that a broader recovery is well underway. And as the labor market continues to heal, we think the ‘lasting damage’ is not as bad as initially feared. Given its social importance, labor market stability should continue to be top of mind for policymakers. But it is unlikely to prompt further broad-based policy easing, be it monetary or fiscal. Targeted policies to upgrade infrastructure, encourage consumer spending, and further open up the economy are likely to continue.

What does all this mean for investors?

From a macro perspective, a more broad-based recovery, in which consumers play a bigger role, is the most critical part of a sustainable growth recovery. It supports China’s growth, as well as the country’s higher interest rates versus the rest of the world—which is one of the key reasons we like Chinese assets in general, including the RMB.

From an equity perspective, this could be positive for global consumer names that have a significant presence in China. We have grown more constructive on cyclical stocks globally, which will likely benefit from the uptick in global growth. Within China, we continue to like the leaders in the consumer technology sector. Some value sectors could also benefit from a more broad-based recovery in the coming quarters, but it’s important to be selective. 

Footnotes:
1: Golden Week figures are from Ministry of Culture and Tourism, as of October 2020.
2: Ctrip.com’s big data report on National Day holiday, 2020.
3: Haver Analytics. Data is as of October 2020.
4: National Bureau of Statistics, as per July 2020 briefing on the labour market.

All market and economic data as of October 12, 2020 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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